More on Tax Cuts for the 'Rich'

At a recent town hall meeting, the President explained that 85% of the revenue lost from extending current tax rates would go to the benefit of "millionaires and billionaires." In a recent speech in Richmond, Virginia, the President went a step further, claiming that the extension of the top two tax rates would benefit people who are "typically millionaires and billionaires." The President's obvious intention is to distract voters from the rather large swath of income between $208,850 and $1 million and instead point to the benefits received by what he calls the "wealthiest Americans."

The claim that the "typical" household impacted by the proposed tax increase is a millionaire or billionaire is false. According to most recent IRS data, of the 4.375 million taxpayers with gross income above $200,000, 4.054 million (93%) make less than $1 million. It's difficult to see how "millionaires" typify those households in line for a tax increase since they account for just one-in-14 of the households with gross incomes above $200,000.

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A close look at the distributional consequences of raising taxes seems to provide ephemeral support for the claim that extension of current tax rates is a "giveaway to the rich." The problem with this construction is what is meant by both "giveaway" and "rich." A giveaway implies that imposing a lower rate of taxation on a household's income is equivalent to mailing that household a check, as though they won the Publishers Clearinghouse sweepstakes. While some progressives undoubtedly feel that's true, the analogy ignores that the household has to engage in some form of economic activity to generate the income; at the very least, the household cannot access the "giveaway" without first providing substantial amounts of investment or value-added labor to generate the income necessary to be in that tax bracket.

Designating high-income households as "rich" also mistakes correlated, but distinct, economic phenomena; wealth is a "stock" statistic, while income is "flow" statistic. Wealth is calculated as household net worth: the sum of all of the household's physical and financial assets net of liabilities like mortgages, car loans, and other kinds of debt. Income relates to the amount of cash generated (or recognized) that year. A 72-year old widow with a $3 million net worth and $100,000 of interest and Social Security income should be thought of as "rich," while a two-earner household in their early-40s with a $75,000 net worth (after accounting for student loans and other debts), three children, and a combined $350,000 income probably should not. A recent New York Timesarticle spent time discussing what level of income made someone "rich" without considering that income itself was a flawed measure of the construct.

It is no accident that proponents of tax increases insist on describing high-income households as "wealthy" or "rich." They are perfect foils to the term "working class" because they imply idleness and leisure. But this is exactly backwards: the households in the top two tax brackets have such high incomes precisely because they tend to work far more and have more specialized work skills. Since income is derived from labor and investment (with the investment income coming from savings generated by previous labor income in excess of consumption expenditures), it is not surprising that income and the number of hours of labor supplied would be positively and tightly correlated. When one thinks of what it means to be "high income" rather than "rich," the kinds of households one could imagine being impacted by the tax increase are those with two earners who work as doctors, lawyers, and business professionals, tend to live in high-cost metropolitan areas, and happen to be in their peak earnings years.

As a Tax Foundation analysis of Census data shows, this is precisely the impacted demographic. Households in the top two income-tax brackets are nearly three times more likely to have two earners, tend to work 27 hours more per week, on average, than households in the other tax brackets, and are 60% more likely to be headed by a worker between the ages of 45 and 64. [Emphasis ours].

We're not fond of "class" language, but we're tempted to suggest that maybe the Republicans should start responding to President Obama's talk about tax cuts for the "rich" by accusing the president of plotting tax increases on the working class.

The editorial, which is worth reading in its entirety, goes on to discuss some of the potential effects on the economy if these high-income households responded to the tax increases by working less: "The decision of a second earner to leave the workforce could result in a reduction in the enrollment at a daycare, which reduces the income of the child-care worker. The taxpayer no longer spending time at the office on Saturdays could be inclined to pursue home improvement projects, depriving the contractor of income that would have come from building the new deck or repainting the home."